Question

Suppose you are offered $7,300 today but must make the following payments:

  

Year	Cash Flows ($)
0	$ 7,300
1	−4,000
2	−2,700
3	−1,800
4	−1,200

  

a.	What is the IRR of this offer? (Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16))

  

IRR

%

b.	If the appropriate discount rate is 10 percent, should you accept this offer?
	Reject Accept

  

c.	If the appropriate discount rate is 22 percent, should you accept this offer?
	Reject Accept

  

d-1.	What is the NPV of the offer if the appropriate discount rate is 10 percent? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16))

  

NPV

$

  

d-2.	What is the NPV of the offer if the appropriate discount rate is 22 percent? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16))

  

NPV

$

Answer 1

A.
In the subsequent questions, we have been given a range of discount rate i.e., from 10% to 22%, so it is most likely that the IRR rate will be in between 10% to 22% only.
We know that the IRR is that rate where Net Present Value become Zero i.e., NPV = 0
The marked one indicate that the IRR is between 15
	Year	Cash flows	10%	15%	18%	20%	15.75%	22%
	0	7300	$7,300.00	$7,300.00	7300	7300	7300	7300
	1	-4000	($3,636.36)	($3,478.26)	-3389.83	-3333.33	-3455.72	-3278.69
	2	-2700	($2,231.40)	($2,041.59)	-1939.1	-1875	-2015.22	-1814.03
	3	-1800	($1,352.37)	($1,183.53)	-1095.54	-1041.67	-1160.67	-991.272
	4	-1200	($819.62)	($686.10)	-618.947	-578.704	-668.494	-541.679
NPV			($739.75)	($89.48)	256.5893	471.2963	-0.10588	674.3317
Therefore @15.75%, NPV = 0, which means IRR is 15.75%													Year	Discount rates & PV of Discount rates
														10%	15%	18%	20%	15.75%	22%
B.													0	1	1	1	1	1	1
The discounting/expected rate is 10% but the project is giving an IRR of 15.75%, so the return is more than expected, ACCEPT THE PROJECT													1	0.909091	0.869565	0.847458	0.833333	0.863931	0.819672
													2	0.826446	0.756144	0.718184	0.694444	0.746377	0.671862
C.													3	0.751315	0.657516	0.608631	0.578704	0.644818	0.550707
The discounting/expected rate is 22% but the project is giving an IRR of 15.75%, so the return is less than expected, REJECT THE PROJECT													4	0.683013	0.571753	0.515789	0.482253	0.557078	0.451399
D1.
As shown in the above table, @10% discount rate, NPV = -$739.75 i.e., NPV is NEGATIVE
D2.
As shown in the above table, @22% discount rate, NPV = $674.33 i.e., NPV is POSITIVE